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Asia’s Private Equity News Source avcj.com June 24 2014 Volume 27 Number 23
FOCUS DEAL OF THE WEEK
Crate expectationsPrivate equity fills the logistics-shaped hole in China’s consumer story Page 7
The second coming Global secondaries see fundraising surge Page 11
A Pixar of the East?VC firms support China animation studio Page 13
DEAL OF THE WEEK
New Horizon’s Yasushi Ando charts 12 years in Japanese private equity
Page 15
Quadrant sees quick turnaround on Australia pet products play
Page 12
Creador sees India water shortage solution with plastic pipe maker
Page 12
P2P lenders: China’s latest VC bubble?
Page 3
ADB, Carlyle, CIC, Creador, Milestone, MSPEA, Next Capital, TA Associates, TPG, Orchid Asia, PSERS, SAIF, Qiming, Warburg Pincus
Page 4
EDITOR’S VIEWPOINT
NEWS
PROFILE
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Number 23 | Volume 27 | June 24 2014 | avcj.com 3
EDITOR’S [email protected]
CHINA VENTURE CAPITAL GOES THROUGH fads and phases. A business model – perhaps already proven in another market – is rolled out locally. This precipitates a flood of copycats, plunging the market into a period of cutthroat competition. Consolidation follows as those that have managed to achieve scale prevail at the expense of those that have not. VC investors count their victories and defeats.
This dynamic is most apparent in distinct niches, with group-buying the obvious recent example. Early mover Lashou was on course for an IPO in late 2011 only for the wheels to fall off six months later. As many as 1,000 sites shuttered during 2012, leaving less than 2,700 in operation. The number has since dwindled further.
Is online peer-to-peer (P2P) lending the latest bubble? Yes and no. There has certainly been a ramping up of investment in the space. AVCJ Research has records of 12 deals in the last 18 months but anecdotal evidence suggests this barely scratches the surface. According to one estimate, 71 of the 800 online lending platforms operating in China last year went bankrupt.
The industry already appears to be in consolidation mode, but there are two distinguishing features worth noting. First, the likelihood of a government clampdown – P2P lenders are behaving like banks but they aren’t regulated – may give some investors pause for thought. Second, a number of industry participants have identified ways in which they can differentiate themselves from the masses.
CreditEase, for example, is China’s largest P2P platform by virtue of cultivating a presence online and offline. Indeed, the bricks-and-mortar
operation may reassure potential online users of the company’s reliability and sustainability.
Others pour resources into risk controls. PPDai, which has received backing from Lightspeed China, Sequoia Capital and Noah Holdings, claims to conduct 2,000 dimensions of analysis to determine a borrower’s default risk. Last week, Morningside Technologies joined Softbank China Capital in a Series B round for Yooli.com. The firm, which was started by a former executive at TPG Capital, uses third-party institutions to assess credit ratings and third-party guarantors to ensure lenders receive monthly returns.
The market opportunity of P2P is clear: online platforms are a bridge between individual lenders and small-scale start-ups; they can fill the funding gap left by banks that prefer to lend to larger enterprises. The industry is also at such a nascent stage that it is difficult to tell how big it could become and how many different business models it could accommodate.
One thing worth noting about group-buying, though, is that the survivors were able to fall back on broader businesses. Group-buying became an add-on rather than a single core function. The economics are different in online P2P lending but movements of the internet giants – which could feasibly bolt lending functions on to e-commerce or social media and software platforms – should be watched with interest.
Tim BurroughsManaging EditorAsian Venture Capital Journal
Revert to the norm?
Managing Editor Tim Burroughs (852) 3411 4909
Staff Writers Andrew Woodman (852) 3411 4852
Winnie Liu (852) 3411 4907
Creative Director Dicky Tang Designers
Catherine Chau, Edith Leung, Mansfield Hor, Tony Chow
Senior Research Manager Helen Lee
Research Associates Herbert Yum, Isas Chu, Jason Chong, Kaho Mak
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Director, Business Development Darryl Mag
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T. (86) 10 5869 6203F. (86) 10 5869 6205 E. [email protected] disclosed investments in China online finance
Date Amount (US$m) Investee Investor
Dec-13 130.0 Renrendai.com Trust Bridge Partners; Honghe Internet Fund Management
Jun-14 50.0 Yooli.com Morningside Technologies
Nov-12 25.0 ppdai.com Sequoia Capital
Jun-14 13.9 Welend.hk Tom.com; Sequoia Capital China
Feb-14 10.0 Jimubox.com Ventech Capital China
May-14 10.0 VFinance.cn IDG Capital Partners
Source: AVCJ Research
avcj.com | June 24 2014 | Volume 27 | Number 234
AUSTRALASIA
Next-owned Hirepool seeks up to $227m in NZ IPOHirepool Group - a New-Zealand equipment rental firm owned by Next Capital - is to raise up to NZ$262 million ($227 million) in what is likely to be one of New Zealand’s largest listings this year. The shares are expected to price between NZ$1.10 and NZ$1.50, valuing the company at NZ$366-425 million. Hirepool plans to offer up to 120.1 million new ordinary shares and sell up to 83.5 million existing shares.
TPG, Carlyle favor IPO exit for HealthscopeTPG Capital and The Carlyle Group are reportedly looking to take Healthscope public rather than seek to exit Australia’s second-largest private hospital operator via a trade sale. The private equity firms are targeting a $2.4 billion offering, which would be the third-largest ever seen on the Australian bourse.
TA-owned SpeedCast buys PNG specialistSpeedCast, a satellite telecom provider owned by TA Associates, has acquired of wireless and broadband specialist Oceanic Broadband in order to boost its coverage of the natural resources sector. TA bought Hong Kong-based SpeedCast from Asia Satellite Telecommunications two years ago for $32.2 million and has now completed five bolt-on acquisitions, four of them in Australia.
GREATER CHINA
Tujia raises $100m Series C roundVenture capital investors have committed $100 million in Series C funding to Tujia.com, a Chinese vacation-rental website. Existing VC backers Lightspeed China Partners, GGV Capital, Qiming Venture Partners, CDH Investments and CBC Capital all participated, plus strategic players HomeAway and Ctrip. China Renaissance Capital is the sole new investor.
CIC to focus on food investmentsChina Investment Corporation (CIC) wants to partner with governments, multilateral organizations and like-minded institutions to
invest in agriculture assets. Xuedong Ding, CIC’s chairman and CEO, said that the private sector and institutional investors have a significant role to play in providing an ample supply of food at affordable prices to a growing and increasingly prosperous global population.
PE-backed Tianhe sees small gain after $658m IPOTianhe Chemicals Group saw its stock gain up to 5% during the first morning of trading in Hong
Kong. The company, which is backed by Morgan Stanley Private Equity Asia (MSPEA) and PAG, raised HK$5.1 billion ($658 million). Tianhe sold 2.82 billion shares, including 2 billion new shares, at HK$1.80 apiece, after pricing the offering near the low end of the indicative range.
VC-backed Xunlei sets terms for $92.5m US IPOXunlei, a Chinese file-sharing and download management platform backed by a string of VC firms, is seeking to raise up to $92.5 million through its US IPO. The company said in a regulatory filing that it will sell 7.32 million shares at $9.00-11.00 apiece, rising to 8.41 million shares if underwriters exercise the full over-allotment option.
CIC promises better oversight on damning auditChina Investment Corp. (CIC) has said it will improve management of its overseas investments after China’s National Audit Office (NAO) said mismanagement had led to losses. The NAO said that a dereliction of duty by CIC management, insufficient due diligence and poor post-investment management had resulted in overseas losses on six projects between 2008 and 2012.
Warburg backs property developer Jinmao IPOWarburg Pincus has agreed to buy HK$77.5 million worth of shares in Chinese property developer Jinmao Investments’ Hong Kong IPO, which is targeting up to HK$3.39 billion ($437 million). The private equity firm is one of four cornerstone investors that will between them contribute HK$310 million.
UCloud raises $50m Series B roundUCloud, a China-based cloud services provider, has raised $50 million in a Series B round of funding led by Legend Capital and existing investor Bertelsmann Asia Investments. Bertelsmann previously participated in s $10 million Series A round alongside DCM in November.
Milestone leads $35m round for JHL BiotechMilestone Capital has led a $35 million Series B round of investment for JHL Biotech, a Taiwan-based biopharmaceutical manufacturer. The
PSERS re-ups as Orchid Asia seeks $750m for Fund VIPennsylvania Public School Employees’ Retirement System (PSERS) has committed up to $75 million to Orchid Asia’s sixth China fund, which has a target of $750 million. The pension system, which had $51.4 billion in assets under management as of March 2014, invested $40 million to Orchid’s previous fund, which closed at $650 million in 2011.
Orchid Asia VI will pursue investments in companies headquartered in China or with significant operational growth opportunities in the country. The primary remit is China with Taiwan and Hong Kong, but up to 25% of the corpus can be invested in other geographies, according to a PSERS presentation.
The private equity firm targets industries with high barriers to entry or leading companies with good growth prospects. It typically backs experienced executives with Western training who are operating China franchises similar to those that have been successful in the US. The consumer, healthcare, technology and outsourced manufacturing and services are of particular interest.
The fund will write equity checks of $5-50 million, rising to as much as $100 million in select cases.
Orchid’s fifth fund had delivered a net multiple of 1.7x and a net IRR of 55.1% as of December 2013.
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avcj.com | June 24 2014 | Volume 27 | Number 236
round involved a consortium of Taiwanese VCs, including existing backers China Development Industrial Bank, Biomark Capital and Kleiner Perkins Caufield & Byers.
Qiming appoints two new partnersQiming Venture Partners has appointed two new partners, Kuantai Yeh and Jing Wu, who join from Highland Capital Partners and CITIC Private Equity, respectively. Yeh will be responsible for information technology deals while Wu will focus on the internet and consumer spaces.
NORTH ASIA
Carlyle to acquire Sunsho PharmaceuticalThe Carlyle Group has agreed to acquire Sunsho Pharmaceutical, a contract manufacturer in the Japan’s health and nutrition (H&N) industry. The financial details of the transaction - which will see the PE firm take a 100% stake - were not disclosed. Set up in 1993 and headquartered in Shizuoka, Sunsho claims to be one of the largest H&N contract manufacturers in Japan.
CyberAgent launches $50m start-up fundCyberAgent Ventures, the corporate VC arm the Japanese internet firm, has formed a new fund worth JPY5 billion ($49 million). The fund, called CA Startup Internet Fund No.2, is almost double the size of its predecessor.
SoftBank’s VC arm to help Kony expand in AsiaThe VC arm of Japan’s SoftBank Corp. has led a $50 million round of funding for US-based Kony with a view to helping the enterprise mobility company expand in Asia. The round also included existing investors Insight Venture Partners, Telstra Ventures and Georgian Partners, as well as new participants Delta-V and Hamilton Lane.
KDDI, Jafco invest $12m in news app GunosyJapanese telecom giant KDDI Corp. has led a JPY1.2 billion ($11.8 million) round of investment in news app developer Gunosy. Jafco and another unnamed investor also joined the round. This is KDDI’s second investment in the company, following the acquisition of a minority stake for undisclosed sum in March.
SOUTH ASIA
ADB invests $50m in Welspun RenewablesThe Asian Development Bank (ADB) has committed $50 million to the renewable energy division of India’s Welspun Group. A Foreign Investment Promotion Board (FIPB) filing from earlier this year approved the acquisition of a 13.3% stake by ADB. It also permitted Welspun Renewables to issue INR2.2 billion
in compulsorily convertible debentures to Germany’s DEG.
SAIF leads $25m round for BookMyShowSAIF India has led a INR1.5 billion ($25 million) round of funding for Bigtree Entertainment, the company behind cinema and events ticketing site BookMyShow. Existing investors Accel Partners and Network18 also took part in the round.
Intel Capital leads $16m round for VizuryIntel Capital has led a $16 million Series C round of funding for Indian client relations management (CRM) platform Vizury. Ascent Capital, and existing investors Nokia Growth Partners and Inventus Capital Partners, also took part in the round. The investment brings the total amount raised by Vizury to $27 million, with Ojas Ventures participating in the two earlier rounds.
Tano Capital invests $8.5m in Safari IndustriesTano Capital will pay INR498 million ($8.5 million) for a 20% stake in Safari Industries India, a plastic moulded luggage maker, through a preferential allotment of shares. According to a regulatory filing, the issue was approved at a meeting of Safari’s board on Monday. Tano will buy 830,000 equity shares for INR600 apiece.
SOUTHEAST ASIA
Creador Fund II to reach final close in AugustIndia and Southeast Asia-focused GP Creador is set for a final close of $250 million on its second fund in August, having already raised $220 million. A source familiar with the matter told AVCJ add that while the fund was on course to reach its target, it could eventually raise much a $275 million. The hard cap is $300 million.
Singapore’s Sova raises $3m seed roundSova, a Singapore start-up that provides a cloud-based WordPress hosting service, has secured $3 million in seed funding from undisclosed investors. Launched in December by Miyako Itonaga and Takashi Fujimoto, Sova focuses exclusively on WordPress, which enables it to save on engineering costs.
MSPEA in construction materials carve-outMorgan Stanley Private Equity Asia (MSPEA) has acquired a construction materials business from a subsidiary of South Korean conglomerate Hanwha Group in a deal worth KRW300 billion ($293.4 million), including debt. The PE firm’s contribution is around KRW141.3 billion.
Hanwha L&C produces advanced materials typically used by the auto, electronics and solar power industries, as well as construction materials. The decision to split the business allows Hanwha L&C to focus on its core operations and also pay down debt. The company’s debt
ratio will decrease from 180% to 110% post-transaction.
The deal is part of a broader trend whereby Korean conglomerates, either in distress or under political pressure, are divesting non-core assets. MSPEA offered guarantees to the 600-strong workforce of job security, adequate working conditions and welfare benefits over the next five years. The construction materials unit is set to spin-out from its parent by July 1 and come under private equity ownership by the end of the month.
The unit produces PVC windows and doors, flooring materials, decorative films and sheets, and engineered stone surfaces. Last year it recorded revenue of KRW719.8 billion and an operating profit of KRW22.2 billion.
NEWS
Number 23 | Volume 27 | June 24 2014 | avcj.com 7
COVER [email protected]
“THE SUCCESS OF OUR BUSINESS HINGES on our ability to provide superior customer experience, which in turn depends on a variety of factors. These factors include our ability to continue to offer authentic products at competitive prices, source products to respond to customer demands, maintain the quality of our products and services, and provide timely and reliable delivery, flexible payment options and superior after-sales service.”
Of the potential weaknesses disclosed by Chinese e-commerce giant JD.com in filings ahead of its $1.8 billion US IPO, “timely and reliable delivery” received particular attention, not least because of the firm’s plans to address the issue by building out its own infrastructure.
JD is a poster child for e-commerce growth and the growing pains that come with it. The company plans to spend up to $1 billion on supply chain improvements over the next three years and made no secret as to the reason why: China’s warehousing and last-mile delivery services are insufficient to meet the needs of online retailers that want to reach more consumers without sacrificing on quality.
JD and its counterparts are not the only ones clamoring for better infrastructure. Demand is driven by changing domestic consumption patterns, which have also stimulated growth in third-party logistics (3PL) and the roll-out of organized bricks-and-mortar retail.
“You have to get something from A to B in the most efficient way and cost-effective way and you do that through modern logistics,” says Sachin Doshi, head of non-listed real estate investments for Asia Pacific at Dutch pension fund APG Asset Management. “It is very hard to deliver goods on the same day to someone in Shanghai or Beijing if you spend a lot of time in a shed trying to find things.”
The companies seeking to fill this gap require capital and PE players, whether fund managers or institutional investors, are willing to provide it. According to AVCJ Research, $4.8 billion has been invested in warehousing and trucking and courier services in China in the last 18 months.
Several express logistics players – the last-mile service providers – have received funding to support nationwide expansion plans, notably SF Express. On the warehousing side, this year
APG invested $650 million in Warburg Pincus-backed e-Shang, Shanghai Yupei received $250 million from RRJ Capital and Temasek Holdings, and a consortium featuring Hopu Investments and several Chinese institutional players injected $2.5 billion into Singapore-listed Global Logistic Properties’ China business.
PE represents just one portion of the capital entering the sector, and while the fundamentals are in China’s favor, there are still concerns at the pace of deployment, particularly in warehousing.
“The unleashing of investment seems to be as much for the future potential of the land as for the need to service the logistics sector,” says Mark Millar, a China logistics veteran who now serves
as managing partner of industry consultancy M Power Associates. “Some people are building a pipeline for future development but others – and it’s mainly local companies – are speculating.”
Growing painsThe growing pains in China’s logistics sector are tied to the evolution of the economy as a whole. Having made its name as the factory of the world, China is now an emerging hub for consumer spending. As the economy evolves, so must the infrastructure that underpins it.
Meeting the needs of modern domestic retail is far more complicated than those of export-oriented manufacturers. Products go through warehouses and distribution centers where they are broken down into smaller consignments,
often relabeled or repackaged, and then released in increments, based on end-user needs. It requires a level of service, geographical coverage and infrastructure that China simply does not possess in scale.
Euromonitor International projects that consumption in China will grow from RMB21.1 trillion in 2013 to RMB27.1 trillion in 2016. Online retail sales alone will more than double over this period, reaching RMB3.8 trillion, iResearch estimates. However, logistics cost as a percentage of GDP is 18% in China compared to 8% in the US. Logistics space per capita is one twelfth that of the US, and even with projected expansion from the current 550 million square meters of
space to 2.4 billion sq m by 2029, the per capita figure will still be one third that of the US.
GLP claims that only 20% of the existing supply can be classified as modern, with much of the stock too small or obsolete. It feeds into the still highly fragmented 3PL market. “One of the reasons some players struggle to grow is that it is hard to secure warehousing space,” says Jeffrey Perlman, a principal at Warburg Pincus.
This dynamic has attracted plenty of long-term capital. Since the global financial crisis, sovereign wealth funds and pension funds have sought operating partners that bring them exposure to the asset class that goes beyond a blind pool. Joint ventures and fund management structures give the likes of GLP and Goodman – which works with Canada Pension Plan
Filling the gapSpurred by a lack of high-quality supply and rising demand from retail customers, private capital is flooding into China’s logistics sector. The fundamentals are strong, but investors and operators must be disciplined
Logistics space per capita - China vs US
Source: Global Logistic Properties
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Investment Board (CPPIB) in China – additional firepower to what sits on their balance sheets.
Local execution capabilities are an important consideration. E-Shang, which has grown from a start-up to 1.5 million sq m of capacity in less than three years, is a prime example.
Having recognized logistics as a beneficiary of the urbanization and rising domestic consumption theme, Warburg Pincus noted a gap in the market for a national-scale warehouse developer. “Even for businesses in our retail portfolio, the lack of available warehouses to store goods was an impediment to growth,” Perlman says. “We felt there was an opportunity to find the right local partner and build this platform, which would be primarily focused around domestic consumption.”
The team wanted a local partner with the ability to acquire land in scale, and not just in one specific market; the ability to control construction costs and deliver projects on time, an important consideration when seeking repeat business from clients who require build-to-suit projects; and a substantial portfolio of existing tenant relationships, to ensure that there was sizable demand to meet this new supply.
They found no one among the local incumbents that ticked all three boxes. Their solution was to start from scratch with Jeffrey Shen and Sun Dongping. The former used to work for Prologis so he came with a rolodex of tenant relationships plus development expertise. The latter owned a contracting business for modern warehousing and had also developed a number of projects on his own account. He offered construction and land-sourcing expertise.
Land-sourcing was also a factor when GLP brought in the consortium of Chinese investors earlier this year. The company is the largest independent player in the market with over 9 million sq m of gross floor area and about the same again in its development pipeline. But in a fast-evolving environment it wanted partners
that could deliver more customer relationships and better access to land.
Know your marketWhile China has yet to reach the level of saturation seen in developed markets, there is already evidence of tighter land supply in larger urban areas that account for the bulk of demand and therefore the highest concentration of warehousing. This is in part because local governments would rather see land put to other, more lucrative purposes.
“If you build a production facility on a piece of land you might be creating 5,000 jobs; build a warehouse on the same piece of land are it is probably 500 jobs,” says M Power’s Millar. For a local authority, warehousing is not a big
contributor in terms of income generation, taxes and payroll. So supply is relatively tight.”
Phil Pearce, managing director for Greater China at Goodman, notes that government recognizes the current supply chain inefficiency and the need for better logistics infrastructure. To this end, policies have been introduced to support the industry.
However, obtaining land in tier-one cities is becoming more difficult, which means logistics providers must either move to the periphery or seek out brownfield sites that can be redeveloped. For example, Goodman has a facility in Langfang, a third-tier city in Hebei province, but one that is in close proximity to Beijing. The company has also bought brownfield sites in Suzhou and is looking at doing the same in Beijing and Shanghai. Multi-level warehousing is also coming into vogue.
For all industry participants, it is a question of finding a balance between demand and supply, leasing price and acquisition cost. And it works both ways. “There are cities where it’s easier to get land but you have to be careful,” says Pearce. “We are confident on the demand side but in some markets there will be incidents of
oversupply as everyone jumps into these areas where it is easier to secure land.”
Much of this bullish sentiment can be tied to the very visible needs of e-commerce. A couple of years ago, e-commerce accounted for 3% of GLP’s total leased area in China; now it is 25%. Goodman has gone from zero e-commerce three years ago to close to 20% today, with e-commerce companies responsible for 30% of leasing deals struck in the last 12 months.
The combination of restricted supply and rapidly expanding demand has created an attractive economic proposition. But the relationship between the e-commerce and the logistics industry has yet to find equilibrium.
For example, both Alibaba and JD are investing in their own logistics infrastructure, although in different ways. Alibaba is primarily an online marketplace, facilitating transactions rather than shipping from its own inventory. The company does not directly own physical infrastructure, but in China Smart Logistics – a joint venture with express delivery companies and real estate developers – it has developed an information platform that serves as a conduit between buyers, sellers and logistics partners.
JD, on the other hand, carries inventory. The company claims to have built the largest fulfillment infrastructure of any e-commerce company in China to support online direct sales and marketplace business. “Given the underdevelopment of third-party fulfillment services in China in terms of both warehousing and logistics facilities and last-mile delivery services, we made a strategic decision in 2007 to build and operate our own nationwide fulfillment infrastructure,” JD says in its IPO prospectus.
The company operates 86 warehouses with an aggregate gross floor area of approximately 1.5 million square meters in 36 cities as well as 1,620 delivery stations and 214 pickup stations in 495 cities. All its facilities apart from a national customer service center are leased. The company employs approximately 24,400 delivery personnel, 11,100 warehouse staff and 5,800 customer service personnel. Same-day delivery is available in 43 cities and over 70% of packages arrive within 48 hours of an order being placed.
JD plans to expand its infrastructure by acquiring land use rights, building new warehouses and purchasing delivery vehicles. The company has already begun construction on three of five planned of its own fulfillment centers with a view to improving efficiency and reducing reliance on leased premises.
This is in stark contrast to Amazon, which leases 99% of the 84.6 million square feet used for fulfillment and data centers globally. The value of Amazon’s land and buildings increased 54% year-on-year to $4.6 billion in 2013, mainly because
COVER [email protected]
China online retail sales
Source: iResearch
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the firm bought its headquarters. There was a more substantial commitment to equipment and software – up from $6.2 billion to $9.3 billion – which appears to tally with accounts of Amazon investing in technology rather than property.
The long gameJD’s strategy does not make logistics providers unduly concerned. As one industry participant puts it, “We think the pendulum is going to move one way for a bit and then move back.”
First, JD is unlikely to be able to service all of its needs in house. Second, most e-commerce companies do not share JD’s ambitions and are expected to continue leasing, not least because they are growing so fast right now that renting facilities brings welcome flexibility. Third, when growth finally slows, investors in publicly-traded e-commerce companies might start asking why capital it tied up in assets that deliver lower returns than the core business.
Amazon is GLP’s largest tenant in China, with Vancl fourth and JD eighth. E-Shang, meanwhile, also counts JD as a client and built China’s largest e-commerce fulfillment center for Amazon.
“Logistics is key to their operations so they are probably going to team up with traditional logistics developers,” adds APG’s Doshi. “The way we see this business growing is a large
e-commerce company comes to e-Shang and says, ‘I want to set up a 50,000 sq m facility in Chengdu, why don’t you go do it and I’ll give you a 10-year lease.’ There will be a little bit these guys do on their own but China is a big enough country and the space is large enough for the two models to co-exist.”
What warehouse operators have to be wary of are fractures within the fast-growing but volatile e-commerce model as well as among the fragmented collection of logistics and transportation companies that serve them. Consolidation is seen as inevitable in both areas.
“There are a lot of start-up e-commerce companies and so there will be failures,” says Goodman’s Pearce. “It is very important that we
assess the business model of potential customers and ensure we are backing the right one. If we are, then the expectation is they would get bigger and the ones with less viable models would get taken over or close down.”
While there are risks for retailers, the broader impact of e-commerce – perhaps better described as digitally enhanced logistics – cannot be ignored. It is percolating through the ecosystem, forming the bedrock for exchanges all along the supply chain.
A major contributing factor to the inefficiency of China’s logistics sector is goods hitting multiple touch points: an order goes from manufacturer to 3PL to retailer before being routed through another 3PL to the customer. It is gradually being replaced by multi-channel distribution out of a single warehouse thanks to better configuration and information flow.
Chee-Wee Gan, a principal with A.T. Kearney in Shanghai, puts it in the broader context of a bifurcating market. Warehousing and delivery providers are responding to client needs, resulting in the emergence of a premium segment. “The industry was very poor in terms of standards but now we see a differentiation between better providers and the masses. That is why you are seeing some of these companies getting money.”
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Learn how the new government will influence the economic outlook for India and the knock-on effect will this have on the PE industry in a debate featuring the following country experts:
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Number 23 | Volume 27 | June 24 2014 | avcj.com 11
WHEN ARDIAN INTERNATIONAL REACHED a $9 billion final close on it latest secondaries fund in April, eclipsing the $8 billion it accumulated two years earlier, it rounded off a fruitful 12 months for fundraising.
Since the beginning of last year, HarbourVest Partners, Hamilton Lane, AlpInvest Partners, Portfolio Advisors, Auda International and Pomona Capital have all closed funds. According to Preqin, secondaries fundraising reached $24 billion last year. It is largest annual total since before the global financial crisis.
The spike in activity suggests a resurgence of interest in the secondary market and it begs the question what is driving the demand.
“Based on our estimates, dedicated secondary funds and fund-of-funds have $65 billion worth of dry powder. This is a historic high and is a significant driver for current levels of market activity,” says Dominik Woessner, a director with secondaries advisory Cogent Partners in Shanghai. “We estimate that the market will have completed $10-15 billion of transactions during the first six months of this year. This compares to $7 billion during the first six months of last year.”
Driving factorsDeal flow has been driven by two factors. Traditionally, the market has been dominated by heavily discounted sales of underperforming funds. However, some observe that this is less of a factor as the industry matures and becomes more diversified, with large LPs dipping into the secondaries market to rebalance their portfolios on a year-to-year basis.
The other factor is the impact of regulation on institutional investors – particularly banks – as they look to de-risk their portfolio in response to new legislation. This is not a new story. The Volcker Rule was introduced in 2012 to put a cap on banks’ private equity exposure. Some reacted by selling assets straight away, but others held on for a clarification of the rules. However, with recent announcements, this is likely to change.
“There is fresh impetus,” says Tim Flower, managing director and head of Asia secondaries at HarbourVest. “There was a clarification over the Volcker rule timing late last year and there has been a direct reaction. That is one of the reasons his year has been pretty strong.”
Not everyone agrees with this view. Banks are
the only ones directly affected by Volcker and, while they make up a substantial group of sellers, they do not drive the market. “It is certainly one of the drivers but I would not say it is the main driver,” says Woessner. “Banks are among the sellers but they are not the largest group.”
Financial institutions account for 33% of transaction volume. Alongside funds, groups of multiple sellers and public pension funds, they make up 76% of the market. The rest comes from endowments, corporations and family offices.
Another way of looking secondary deal flow is in terms of geography. Hiro Mizuno, partner and head of Asia at Coller Capital, observes that where once positions in Asia-focused funds were excluded from global portfolio sales, now they are often included. This can be linked to the perception that Asia has failed to deliver the risk-
adjusted return LPs were expecting. “If you look back to the deals from 2010-2012,
a lot of folks have gotten burned and they have not seen the liquidity,” says Tom Kerr, managing director and head of the secondary team at Hamilton Lane. “There have obviously been some issues with getting liquidity in Asian funds and, as a result, there is bit of a premium being put on this liquidity today in terms of discount.”
However, this does not necessarily translate into secondary deal flow because Asia continues to make up a relatively small part of the market. It accounts for just 16% of global asset sales together with other emerging markets versus 26% and 58% in Europe and the US, respectively.
“There is just not as much trading activity,”
adds Kerr. “Where you do see positions available, the discounts associated with those positions – from the perspective of buyers – are larger than the sellers want to take, so that dampens activity.”
Mixed fortunesWhile increased fundraising activity is indicative of a maturing market globally, the rising tide has not floated all boats. Paul Capital and Greenpark Capital are the two high-profile casualties.
“The money is getting concentrated in fewer hands and so a couple of platforms have struggled,” says HabourVest’s Flower. “It has not been easy for everybody; there are some haves and some have-nots. I think the people surviving are the very large secondary-only players and the rest are secondary businesses within larger platforms like funds-of-funds.”
Scale is becoming important yet there is also evidence of divergent strategies emerging. The likes of Ardian are more readily associated with very large portfolio deals, while middle-market players leverage their multi-strategy platforms to target particular funds. Segmentation does extend to smaller firms carving out particular niches, but only where the deal flow justifies it.
The secondary market may not yet offer something for everyone, but it is getting there. “Everyone has something for sale and the secondary market has become an accepted solution - one that allows institutions and investors alike to focus on trying to manage their portfolios more actively than ever before,” says Hamilton Lane’s Kerr.
Choice cuts Secondary fundraising has reached new highs over the past year, signaling greater investor appetite for the asset class. What is driving the demand and who is likely to benefit?
Global secondary fundraising activity
Source: Preqin secondary market monitor, UBS
2006 2007 2008 2009 2010 2011 2012 2013
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BOOK NOW AT AVCJSINGAPORE.COM
Find out how the Chinese private equity market is experiencing an upturn and the leading strategies for fundraising and exits from the investors at the forefront of Chinese PE in a session with:
Hear how the ability to generate alpha is more important than ever to achieve superior returns and justify the increased risk for LPs when investing in Asia from regional leaders:
Discover how real assets are playing an increasingly important role for LPs and where you can find the best opportunities in Asia in a discussion featuring leading practitioners:
Learn how the new government will influence the economic outlook for India and the knock-on effect will this have on the PE industry in a debate featuring the following country experts:
Discover where the next wave of opportunities in Southeast Asia can be found whilst deal flow is strong and valuations are competitively priced from seasoned investors:
Explore how Singapore is aiming to recreate the Silicon Valley start-up model and how successful startups have gone from opening to exit in two exciting panels featuring:
1
3
5
7
2
4
6Meet the following LPs that are speaking and attending the forum:
Temasek International Pte. Ltd. • 57 Stars LLC • CPPIB Asia Inc • Axiom Asia Private Capital • GIC Special Investments Pte Ltd • National University of Singapore • Hermes GPE • LGT Capital Partners • Allianz Private Equity GmbH (Singapore) • HarbourVest Partners (Asia) Limited • Ministry of Economy and Finance • J.P. Morgan Asset Management • NTUC Income Insurance Co-operative Limited • The Norinchukin Bank ... and many more!
Reasons why you must attend the AVCJ Singapore Forum (17-18 July 2014)7
avcj.com | June 24 2014 | Volume 27 | Number 2312
NINE MONTHS AGO, THE BIDDING process ended for City Farmers, Australia’s third-largest pet services business. Number two player Petbarn lost out to Quadrant Private Equity. A couple of months after that Petbarn joined forces with Greencross, the country’s leading veterinary services provider. Both Quadrant and Greencross placed their acquisitions in the context of the “humanization” of pets in Australia, tapping an industry now worth A$7 billion ($6.6 billion) and growing at 5% per year.
Last week, domestically-listed Greencross agreed to buy City Farmers for A$205 million, comprising A$155 million in cash and A$50 million in stock. Having paid A$93 million for an 87% stake in the business, Quadrant has already taken approximately A$130 million off the table.
As to why Greencross moved in for City Farmers so soon after Petbarn missed out on the business, Justin Ryan, a director at Quadrant, describes it as a defensive move. “They came back because they wanted to buy it before we became too much of a threat,” he says. “They have a minor presence in Western Australia where we
have a strong presence. We were rolling out in the east and they could never have got coverage in Western Australia without buying our business.”
City Farmers was founded in 1991 and bought by Clayton Hollingsworth, previously CFO of Australian internet services provider iiNet, six years ago. He was supported by several individual and family investors, and both they and he have now exited to Greencross.
Under Hollingsworth’s guidance, City Farmers had grown from 10 outlets to its current 31 large-format stores by the time of Quadrant’s acquisition. It has since added another 11 outlets, predominantly in eastern Australia, as per the PE firm’s plan to build upon a dominant position in and around Perth and develop the business in Queensland and Victoria.
The purchase takes Greencross’ Western Australia pet care retailing presence from five to 26 stores. Once the deal is completed, the company will have 285 locations across
Australia and New Zealand, comprising 177 retail stores and 108 veterinary clinics, specialty and emergency centers, pathology labs and pet crematoria. City Farmers is expected to deliver revenue of approximately A$120 million and
EBITDA of A$20 million for the 2015 financial year, including post-merger synergies.
City Farmers competes against a string of small-scale local operators and supermarket retailers that also sell pet food, supplies and related products. Ryan notes that the veterinary-
plus-pet-services model is proven in other markets because it promotes customer stickiness. A comparable business in the UK, KKR-backed Pets At Home, listed earlier this year and has a market capitalization of GBP1.2 billion ($2 billion).
“We didn’t expect a sale to happen so quickly,” Ryan adds. “But we were the number three player and there was an opportunity to sell and take a stake in the number one player in what is a very attractive business.”
THE PURCHASE OF A MINORITY STAKE IN Vectus Industries, an Indian manufacturer of plastic water tanks and pipes, takes Creador’s tally to $100 million across five deals so far this year. Each investment came from the Southeast Asia and India-focused GP’s second fund, which will close in August on or above its $250 million target.
India accounts for two of these transactions – Vectus and Somany Ceramics – and they follow a broadly similar thesis, capitalizing on urbanization and rising household incomes. While Somany is considered a leading manufacturer of ceramic and porcelain tiles used in construction, Vectus provides water tanks and piping for homes increasingly set up to accommodate India’s chronic water shortages.
“At the most basic level India has a problem with water. Even in the best areas of Delhi you only get two hours water supply per day so you need lots of storage or you run out,” says Brahmal Vasudevan, Creador’s CEO. He notes that demand is not purely an urban phenomenon: as incomes rise in villages more people are buying water
tanks where previously they would not. The company also benefits from a shift in the housing sector from steel to plastic piping
Vectus was established in 2004 by Ashish Baheti and Atul Ladha, who between them have more than 23 years of experience in the retail plastic products business. The company has 11 manufacturing units and distribution agreements with 400 dealers nationwide, serving a customer base that is half property developers and half retail. It distributes water tanks under the Vectus, Ganga and Waterwell brands, and pipes and fittings under the Vectus brand.
Revenue came to $66.7 million for the 12 months ended March 2014, up 34% over from three years ago. Profit has grown 45% over the same period.
Vectus started of manufacturing water tanks but moved into piping because consumers tend to buy both types of product from the same
retail point. However, according to Vasudevan, the main competition remains divided between the two areas. There are 2-3 large players in the water tank space, led by Sintex Industries, and 5-6 in plastic piping, notably Supreme Industries and Jain Irrigation. While the former is a direct rival in residential piping, the latter – which is backed
by Nalanda Capital – focuses on agriculture.
“It’s quite a consolidated market,” Vasudevan adds. “This is because setting up the plant is easy but building the branding and distribution network is a lot harder.”
Sources familiar with the transaction say that Creador will
take an approximately 20% stake in Vectus and Anand Narayan, a senior managing director at the private equity firm, will join the board. The new capital will be used to build new plants and expand capacity as Vectus seeks to maintain its fast growth rate. Creador’s value creation team will also offer strategic support.
DEAL OF THE [email protected]
Quick exit for Quadrant in pet services
Creador’s water scarcity play
Vectus Industries: Pipeline deal
City Farmers: Pet project
GARY WANG HAS START-UP PEDIGREE. The Chinese entrepreneur took online video company Tudou.com from nothing to a US listing, and two years ago, a merger with rival Youku.com in a deal worth $1 billion. Wang now runs an animated film studio, which is already being touted as China’s answer to Walt Disney’s Pixar.
The domestic cinema market is booming, with box office receipts reaching $3.6 billion last year, up 27.5% from 2012, according to the State Administration of Radio, Film & Television. Takings of $4.6 billion are expected in 2014.
The prospects for animated feature films are strong, but home-grown producers have struggled because they trail the likes of DreamWorks Animation and Pixar on the technical side. More importantly, some creative juice is missing. US-based animators have mined Chinese culture to produce compelling stories ranging from “Mulan” to “Kung Fu Panda.” Local players have yet to reach the same heights.
“In China, most animated films are imported from the US; very few are Chinese original content. The most successful domestic films are
probably ‘Pleasant Goat and Big Big Wolf’ and ‘Boonie Bears’ from few years ago, but the quality isn’t as advanced as in the US,” says Jixun Foo, managing partner at GGV Capital.
Wang is trying to bridge the gap with high-quality computer-animated films with a “Chinese cultural touch.” His new venture – Light Chaser Animation Studios – secured $20 million
in a Series B round led by GGV and Chengwei Capital, with participation from existing investors Hillhouse Capital and IDG Capital Partners.
Government restrictions on the number of foreign films that can be shown in China has crept up in recent years – it has increased from 20 three years ago to a soft cap of 34 – but there
is still time for domestic animators to establish themselves at home and then abroad. “That’s what Gary wants to do – providing content not only for kids, like “Pleasant Goat and Big Big Wolf,” but also for broader audience base,” Foo says.
Wang has spent the last 15 months assembling a team of talented animators. According to local media reports, new recruits include a former DreamWorks’ lighting artist and three more art advisors who have previously worked at Pixar and other global firms.
The studio’s first 3D feature-length animated film – “Little Door Spirit” – has a budget of $12 million and will be completed by July 2015. Light Chaser has already released a short film called “Little Yeyos” as a taster of what it can do.
Although Wang’s Youku Tudou days are behind him, GGV and Chengwei both retain seats on the company’s board. It is seen as a potential strategic investor in Light Chaser in the future. “Based on the circle of relationships we have built before, Youku Tudou could be a content distributor for Light Chaser because it has a wide distribution platform,” Foo adds.
DEAL OF THE [email protected]
China’s Pixar dream wins VC support
Light Chaser: China’s answer to Pixar
The AVCJ Private Equity and Venture Capital Reports provide key information about the fast changing Asian private equity industry. Researched and compiled by AVCJ’s industry leading research team, the reports offer an in-depth view of private equity and venture capital activity in Asia Pacific, as well as in major countries and regions including Australasia, China, India, North Asia and Southeast Asia. Each AVCJ Report includes the latest statistics and analysis, delivering insights on investments, capital raising, sector-specific activity. The reports also feature information on leading companies and business transactions. For more information, please contact Sally Yip at +(852) 3411 4921 or email [email protected].
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Number 23 | Volume 27 | June 24 2014 | avcj.com 15
IT WAS 1996 AND YASUSHI ANDO – NOW CEO of Japan’s New Horizon Capital – was in Europe staring at a 149-foot-deep hole, a $3 billion debt mountain and 174 large chunks of paperwork. As part of the corporate restructuring team at Bank of Tokyo-Mitsubishi’s investment banking division, Ando was one of four men charged with restructuring Eurotunnel, the ailing firm behind the eponymous subterranean link between France and the UK.
The four bankers – representing institutions from Europe, the UK, the US and Japan – had to bring together a consortium of 174 banks to refinance Eurotunnel. It was a thankless task. “It was quite difficult work for a non-native speaker,” recalls Ando, “but it was a job that no other Japanese bank was willing to take up. I think during that whole period I never slept more the three or four hours a night.”
The experience, grueling as it was, would prove valuable for what lay ahead in Ando’s career. It also served as his induction into the world of private equity.
“At that time I hadn’t experienced any kind of equity investment when engaged in corporate restructuring with Mitsubishi,” he explains. “However, the US and European companies I worked with had actively utilized those functions so it was quite a new experience for me.”
Cutting his teethPrior to going it alone, Ando had been with Mitsubishi for his entire career. As a graduate of the University of Tokyo, the bank sponsored his MBA at the University of Chicago. It was 1986, the year before the Black Monday global stock market crash. Japanese banks were among the biggest creditors to hard-hit US and European companies and a position with Mitsubishi’s corporate restructuring team in London was to be Ando’s first posting.
“I arrived during the last two years of the Thatcher administration and so there was a lot of privatization which kept us very active,” he recalls. “Then, soon after, the US and Europe went into a recession so I got to experience quite a lot of corporate rehabilitation work.”
Ando spent seven years in the UK before returning to a Japan wallowing in its own economic troubles. He was promoted to the number two position of the Mitsubishi’s
corporate planning division and built on the corporate restructuring experience he gained in Europe, this time dealing with Japanese companies. “It was a tough time,” he says. “Ironically the UK and US economy had recovered quite well but when I returned to Tokyo, Japan was experiencing its worst years.”
In 2002, Ando had decided to set up his own fund. His decision was driven by two factors: a desire to make use of the experience he had built up in London and Tokyo; and frustration with the bureaucracy and slow decision-making of Japanese banks.
Phoenix Capital was launched with a small amount of his own capital, after which he starting raising his maiden fund. In the space of two months Ando leveraged pre-existing relationships to raise JPY20 billion ($200 million). Early backers included a number of local Japanese banks and Ando’s former employer, Mitsubishi, which contributed $30 million. Another $30 million come from the Development Bank of Japan.
The investment thesis was in line with Ando’s experience up until that point: failing companies in need of restructuring with an average ticket size of $20-30 million. The fund was sector-agnostic but manufacturing was a common theme. Over the next four years Phoenix would go on to raise a further five funds and end up with a total $3.2 billion in capital under management. However, by that time Japan was going through another change.
“By the end of 2006, there weren’t many corporate restructuring deals because the Japanese economy had recovered quite well,” says Ando. “We needed to establish another fund to widen our target, so we did a spin-off.”
Ando formed Phoenix Capital 2 – later renamed New Horizon Capital – with a remit
to invest in growth companies. But the timing would prove disastrous. The fund launched in 2007 and reached a first close of JPY5 billion, only to run into the global financial crisis.
Further fundraising was aborted and New Horizon focused on deploying what capital it had. The fund’s first investment was Hitachi Housetec, carved out from Hitachi Chemical. The business was exited to consumer electronics
retailer Yamada Denki in 2012.“After we made an exit,
we decided to go for a second fund that year and we have so far successfully raised $160 million, which is a good size” says Ando. “We have a huge pipeline of new investments so now we need to concentrate on that.”
Ando hints that a new vehicle may be in the pipeline for next year, but in the meantime he has been focusing his energies on the broader private equity industry. As an advisor on alternative investments to Japan’s ruling Liberal Democrat Party, Ando has played an active role in pushing the country’s public pension funds – including the Government Pension Investment Fund (GPIF) – to increase their allocations to private equity.
“Because of the lack of venture capital and private equity in Japan there are a lot of zombie companies surviving,” he says. “To change that situation we need encourage venture capital and private equity by introducing pension fund money.” He has even written a book in Japanese on the topic – “How vulture funds will restore the economy” – which outlines his private equity manifesto for Japan’s recovery.
“We need to educate people on PE and VC and how important these funds are,” he says. “I hope by the time we raise our next fund we can have a discussion with GPIF about private equity opportunities – not only for our own sake, but for others in the industry too.”
Rise of the phoenix New Horizon Capital CEO Yasushi Ando has emerged as a leading voice for boosting the profile of private equity in Japan. His efforts are starting gain traction but the journey has not been smooth
“I hope by the time we raise our next fund we can have a discussion with GPIF about PE opportunities”
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